Friday, November 21, 2014

Illuminating corruption trends in PNG

A Commentary by Sam Koim*

INTRODUCTION

Corruption flourishes in secrecy
and the ignorance of the people. Shedding light on corruption trends is therefore
an integral part of curtailing the spread of this pernicious social disease hence
this article.

Investigation Task-Force Sweep
(ITFS) initially commenced its investigation into the expenditure of
development budget at the National Planning Department. The investigation
uncovered instances, amongst others, where shell companies (or sometimes called
“K2 companies”) were used as fronts to squander public funds. Funds were expended
with either no project undertaken or project left incomplete. Detecting the
fraud in such simple trend of corruption is easy.

A new trend of corruption appears
to be emerging in the area of expenditure of development funds. It is rather a
complicated and higher level of corruption. This time, well established
businesses, even multi-national corporations are used to generate illicit gains
for the firms and public officials. In most cases, the projects are so huge
like “white elephants” that the spill out of economic rents is obscured. At the
same time, the trumpeting of the unbroken economic boom is so loud that the voices
of the silent suffering majority are barely audible.

This article seeks to expound on
some of the common features of high level corruption and its effects on the
economy and the wellbeing of the people and the country.

CORRUPTION AND ITS TYPOLOGIES IN PNG

Corruption is a global phenomenon.
Corruption can be defined as “the abuse of entrusted power for private gain”. The
accepted formula of Corruption equals monopoly plus discretion minus
accountability. If a system gives an official monopoly power over a good or
service, the discretion to decide how much a particular client receives, and is
not accountable, then the system will be prone to corruption.

In Papua New Guinea (PNG), it
seems that the monster rears its ugly head in nearly all facets of the society.
There are many causes, typologies, levels and effects of corruption. There are
four basic types of corruption, the attributes of which are seen in PNG today and
they are:petty corruption, grand
corruption, political corruption and State capture. Each of them is briefly
elucidated hereunder.

Petty corruption or bureaucratic
corruption or administrative corruption is the everyday corruption that takes
place where bureaucrats meet the public directly. Petty corruption is also
described as "survival" corruption: a form of corruption which is
pursued by junior or mid-level agents who may be grossly underpaid and who
depend on relatively small amounts to feed and house their families and pay for
their children's education.

Grand corruption is the type of
corruption that takes place in higher levels of government. It is typified by
the misuse of entrusted power by political leaders or senior public servants
and usually involves very large amounts of public money and assets diverted for
personal use.

Political corruption is corruption in,
and of, the electoral and political processes including such; vote buying and
selling; payments between politicians for votes on the floor of parliament; and
payments for affiliation to one, or other coalition.

State capture is corruption within the
legislature, executive, ministries and the judiciary where private interests
significantly influence a state's law-making and decision-making processes. It
is because of State capture that we see acts such as allocation of
discretionary expenditure by MPs that are corrupt though not necessarily
illegal.

The rest of this article
concentrates on addressing State Capture, but before that, the legislative and
administrative framework that breeds State Capture must be appreciated.

FAIR AND EQUITABLE DISTRIBUTION OF NATIONAL
DEVELOPMENT

The Second Goal of the National
Goals enshrined in the Constitution of PNG calls for the equalisation of
services and development projects in all parts of the country. The annual
national budget is the lawful process whereby the national wealth of the
country is fairly and equally distributed. The distributive powers of the
people are vested in the Executive Government. The Executive Government adopts
plans and policies on how to distribute the wealth of the nation. Consistent
with its policy framework, the Executive Government takes the budget initiative
to raise loans and revenue and allocate funds for expenditure. After the
National Executive Council (NEC) is satisfied with the budget estimates and
approves it, the budget is then presented on the floor of Parliament for
Parliament’s deliberation and approval. Parliamentary
Approval of the National Budget takes the form of a sessional legislation
called Appropriation Act.

After the legislative approval of
the budget and the warrants are released by Department of Treasury, the funds
are not up for grabs. The expenditure of public funds including the procurement
of goods and services are regulated by the Public
Finance (Management) Act (PFMA) and the Appropriation
Act. The PFMA specifies a range of procurement authorities and their
respective financial limits to commit expenditures. At the pinnacle of the
procurement authorities is the NEC which approves all contracts above K10
million.

It goes without saying that for a
project valuing K10 million and above under the current context, the Executive
Government has the discretion and to greater extent monopoly on deciding the
type, amount, location and the ultimate contractor of the project. Proponents of
the perverse logic of political expediency would favour the existing process as
it enables the Executive Government to achieve its plans and objectives within
the tenure of their reign. On the contrary, having the good governance lenses
on, one would see that the risks of high level corruption are very high in the
current setting. There is no independent mechanism to ensure that there is
correct and uncontaminated decision concerning the procurement of major
projects valuing more than K10 million. That is a fertile soil for State
Capture to flourish and the next topic examines how that occurs.

THE CAPTURE OF STATE DISTRIBUTIVE POWERS
AND THE PROLIFERATION OF “WHITE ELEPHANT PROJECTS”

A large portion of government
expenditure goes through the procurement process hence the risk of
mismanagement and corruption is high if the processes are not structured and
managed in a transparent, accountable and professional manner. Those risks can
prevail throughout the budget and procurement cycles. When the Executive
Government identifies projects, allocates funds and awards the contracts, the
following are the likely risks and effects:-

Budgetary Process

ØThe Executive Government or individual ministers of the NEC may use
their distributive powers collectively or individually to allocate resources
where the economic rents/commissions would be plentiful and easily collected.

ØIn most cases, “white elephant projects” are identified as that
would reward them with more and easy rents instead of priority projects that
are needed by the majority of the people. These grand projects are too
expensive to build that they exceed their usefulness.

ØDetecting fraud in huge projects is difficult where contracts are
complex and a well-established firm is involved. That is because firstly, the transaction
would not raise a lot of eye brows as it would be for a K2 company; and
secondly because it is difficult to sufficiently benchmark prices of certain
grand projects such as roads. For instance, a K1 million diverted from
teachers’ salaries would be very obvious than the same amount defrauded in a
multi-million kina road project worth K10 million. Extracting K1m from the K10
million project would not make much noise so to speak.

ØWhen projects identification is driven by rent-seeking, feasibility
studies and costs benefit analysis are rarely carried out prior to the
allocation of funds, as doing so would expose the real value and necessity of
the projects.

ØPolitical logrolling for rent-seeking projects would be a common
occurrence in Cabinet. The race would be on in Cabinet where a common unwritten
understanding would subsist –“you support my proposal, I will reciprocate when
it’s your turn, let’s look after each other”.

ØIn circumstances where the Government has the numerical strength on
the floor of Parliament, a budget that is otherwise contaminated with blended
private interests can be sanctioned without much scrutiny.

Expenditure –Procurement

ØSecrecy breeds corruption. When economic rents become the motive,
some white elephant projects are not publicly tendered. Instead closed tenders
are preferred. In other cases, Certificate of Inexpediencies (COI) are issued
on projects that do not lawfully qualify for it. Also at times, projects may be
publicly tendered on a reasonable price as a smokescreen but after the contract
had been awarded, ridiculous and unjustified variations are secretly executed
to pour more money into the same project.

ØProcurement officials and politicians in charge of the procurement
process may influence the process to award contracts to the best briber instead
of choosing the best price quality combination. The company in charge of
building the new hospital may for instance not be the one representing the best
price/quality-combination, but rather the most successful briber or the one
with the best governmental connections.

ØThe Central Supplies and Tenders Board (CSTB) can be subjected to excessive
political patronage to ensure that firms with collusive connections with the government
are favourably treated. If the figure is above K10 million and the NEC is
captured by private corporate interests, CSTB merely becomes a facilitator than
a vetting house. The vetting is supposedly conducted by the NEC prior to
awarding the contract.

ØSelecting the best briber distorts open competitive market for State
tenders. As the preferential treatment given to a few collusive firms restricts
the open market to only a few favoured firms, the race for political favours
would be on. More and more unwilling and unfavoured firms would then be
compelled to participate and race for political favours.

ØTogether with the grand projects, the craving for quick rents would
also dictate the location of the projects. For predatory firms that have
collusive connections with public officials, it is time consuming and resource
intensive to mobilise equipment and machinery etc to a remote rural project site
which could potentially trap the firm to a single project for a whole financial
year. To avoid that and extract more rents within less time, pharaonic projects
are selected at locations convenient to the contractor and not necessarily based
on the necessity or economic factors. The result may be construction of
projects several times as costly as necessary, or the acquisition of goods not
actually needed. One that fits well with this description is a particular road
in the National Capital District that has been resealed a couple of times over
–from two lanes to three lanes and now they are working on the four lanes, all
in a space of less than three years. One wonders how much of taxpayers’ money
is actually spent on that particular stretch of road.

ØIt can lower the quality of public goods and services and even
threaten safety. Where the contractors and public officials collude, the need
to conduct the appropriate level of monitoring and evaluation of the
implementation of the projects may be conveniently overlooked. As a result, the
poor workmanships and shabby constructions are rarely exposed. Most of the
capital intensive projects are not properly monitored hence defects surface
immediately after construction is completed.

Effects of the Captured

ØThe Appropriation Act and
the Executive Government are effectively seized by corporate and personal interests
to advance their greed. When the State is captured in this manner, the whole
legal system becomes the opposite of what it should be, because it works to the
advantage of illegal interests that are dressed up in a legal form.

ØThe trend of rent-seeking distribution would encourage crony
capitalism, where those corporations that have close relationship to the
Government of the day or certain politicians would succeed in many government
projects. Those crony capitalists’ positions would be reinforced by the process
of corruption that gives them continued privileged access to the country’s
resources and thereby sustaining their importance to the elite that wishes to
maintain control. If the trend of crony capitalism continues in the size and
volume, it would inevitably result in the country reaching a stage of Plutocracy,
where the predatory corporations will be so powerful that they would dictate
the political, economic and social discourse of the nation.

ØIt would also lead to another form of political and government
corruption known as Kleptocracy, where
the government exists to increase the personal wealth and political power of
its officials and the ruling class at the expense of the wider population,
often with pretense of honest service.

ØThe level of corruption under consideration does distort the real value
and wrongly attaches elevated status of a particular project. In the end, it
results in the proliferation of “white elephant projects” because those who
benefit from it would compete for more of it. Predatory corporations dictate
and poach upon public purpose and will have no loyalties for the nation or its
population. The predatory firms and public officials would reach this
understanding “let’s look after each other as long as we put up a white
elephant project to keep the critics at bay”.

ØSay if the actual cost of a road project is K20 million. The grease
payments made to low level public officials to expedite bureaucratic process
favourably might cost the firm about K100,000. The rents for final political
approval may be K8 million. So in total, the taxpayers are paying K28.1 million
on a project that is worth less than K20 million. The K8.1 million could be
used to construct another much needed project but for corruption.

Modes of Rent transfer

ØThe transfers of illicit gains derived from rent seeking projects
occur in many ways. Where the amount is not substantial, hard cash are being
delivered to the public official. Sometimes, third party fictitious
subcontracts are signed between the contractor and a company that is under the
control of the public official. That is done as a vehicle to transfer the rents
of the public official. At other times, the rents are kept by the contractor
for a delayed benefit. Another way of transferring rents/commissions to and
from is the use of offshore bank accounts. Capital flights to offshore
jurisdictions are also common when there is massive looting of public funds.

PNG is enjoying its unbroken
economic growth as the fastest in the South West Pacific. Be that as it may, the level of corruption in
the country is an important factor to consider when projecting economic growth.
Sometimes, the reality may be far from the rosy appearance.

DEBUNKING THE GDP DELUSION

Gross Domestic Product (GDP) is
the market value of all final goods and services from a nation in a given year,
which is calculated as the population times market value of the goods and
services produced per person in the country[i].
The GDP basket contains consumption of goods and services, investments,
Government purchases and exports/imports.

Although GDP is the widely
recognised measure of a country’s economic performance, the GDP rating can
never and does not represent the true progress of a nation. It does not
measure:- equitable and fair distribution of income throughout the country; intangible
valuables like feeling secure in our own country, environmental damages caused
by resource exploitations, the quality of life, the atrocious living standards,
quality of education and health etc.It
does not measure the level of corruption either. The GDP is therefore not a
comprehensive measure and does not adequately reflect the true health and
progress of a nation.

There is a correlation between
Corruption and GDP. Linking GDP to corruption, the GDP can be stimulated by the
proliferation of high level corruption as well. The constituents of the GDP in
a particular year may be fuelled by consumerism behaviour of those who swim
with effortlessly gained wealth, crony capitalism investments of predatory
corporations and rent-seeking expenditures of the Government.It therefore follows that corruption may help
the most efficient firms bypass bureaucratic obstacles and rigid laws leading
to a positive effect on economic growth.

A country can experience higher
investment and growth rate with relatively high level of corruption. Studies
conducted by the World Bank revealed that countries with more predictable
corruption have higher investment rates. Thus, countries with endemic but
predictable corruption, such as Thailand and Indonesia, have had strong investment
growths. “When business people have confidence that after paying a bribe a
return will be provided as promised, there is less motivation to seek legal
alternatives” (Lambsdorff, 2001b:14). It is sufficient to suggest that when
corruption is prevalent and predictable in a country such as PNG, investment
and economy can also surge.

So the economic growth that PNG is
experiencing does not necessarily mean that there are no leakages in the public
purse. The more money poured into investment, the more chances of corruption it
creates if transparent and good governance mechanisms are absent. The PNG GDP
rating on the other hand may be building an entirely fictional image of the
real progress of the nation, which keeps the unenlightened citizenry under
continuous illusion.

CONCLUSION

Public procurement is the main
area where the public and the private sector cooperate financially. Corruption
in the procurement of major projects is not victimless as it enriches crony
capitalists at the expense of the majority of the society who are denied the
equal benefit. One effect of corruption is that it tilts public spending toward
projects that make it easier to collect on bribes at the expense of priority
programs, hence the proliferation of so called “white elephant projects”. Whilst
corporations that benefit from corruption may consider corruption as a necessary
evil, corruption does have deleterious effects on the economy and the wellbeing
of the nation as a whole. There are other disastrous effects that have not been
covered here.

Real and hard questions should be
asked: Is the GDP a true reflection of the country’s economic capacity to
improve living standards or is it a product of the unholy alliance between the
government and predatory businesses. The boom mentality can affect the way the
government behave, having grandiose plans and ideas to engage in excessive
capital expenditure in anticipation of windfalls from the resource sectors such
as the LNG. Some studies however, have proven that such booms can decrease the
quality of public spending and encourage rent-seeking and we are already seeing
signs of it. The public procurement process is long overdue for reform in order
to ensure that there is transparency and accountability. The allocation of
resources must be guided by the National Goals and Directive principles which a
yardstick to ensure there is fair and sustainable economic growth.

The writer is not against impact
projects. As a growing economy, PNG needs to invest in major infrastructural
impact projects. What really matters is the cost of corruption to the nation?
Having said that, it is also acknowledged that there are firms that have
genuinely invested and conduct clean businesses in the country despite the risky
business climate posed by corruption. In the same vein, there are public
officials who do their jobs honestly and serve the people.

* Sam Koim is the Chairman of
Investigation Task-Force Sweep that combats high-level corruption in PNG
Government sector. The views expressed in this commentary article are that of
the author. Note: References are not included in this paper but are on the
original article.

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